Mind on Money: Be informed and prepared in face of geopolitical instability

Mind on Money: Be informed and prepared in face of geopolitical instability

Last year on the day Russia invaded Ukraine I was speaking to a large group of clients and guests at our annual “kick-off” dinner. During the Q&A part of the event, the questions of course turned to the topic of the impending war in Europe and how it might impact the investors in the room.

My message in response to the questions was consistent. Despite the devastating human tragedy of the emerging conflict, I didn’t think the invasion of Ukraine was really a “market event.” I expected disruption in the energy markets, and unfortunately for the Ukrainians, I thought the least negative case from a Western, particularly American investor, point of view would be a swift resolution of the conflict, which woefully, probably meant Russia achieving its objectives.

I said at the time, the prospect of a prolonged conflict was the most concerning as it would likely lead to heightened geopolitical and then potential elevated market risks.

What I don’t think anyone anticipated at the time, was the absolute valor in the face of overwhelming difficulty shown by the Ukrainian people, as well as the material incompetence of the Russian military illustrated during the last year. These factors, combined with the resolute support of Ukraine demonstrated by NATO, and particularly the United States, have provided a refined picture of the conflict. It now appears this war is going long, and as a result, as investors it’s time to start preparing for the possibility of a higher level of geopolitical risk in our strategies.

While having this conversation with my oldest daughter over the last few days, she dramatically asked if “it’s time to start prepping in the basement and selling all our stocks.” While she may have some legitimate personal excuses for the drama, maybe we can take a more balanced approach to the potential risks we may now need to consider as investors.

I think the first step for all of us is just heightened awareness, and developments over the past week certainly validate this necessity. President Biden's surprise trip to Kyiv, his resolute speech in Poland, Russia suspending its participation in the START nuclear weapons treaty, official declaration of Russian crimes against humanity delivered by the Vice President, simmering allegations of expanding Chinese involvement, the commitment of American and European armor over the past month, and the mounting appeals for western fighter jets, particularly the extremely capable F-16, all suggest the conflict entering a more disconcerting phase. So, do we run for the investment bunkers?

History doesn’t necessarily suggest taking a knee jerk reaction to investing decision-making in the face of this type of risk. A look back at the Dow Jones Industrial average on important dates and events of World War II shows the index increased by nearly 10% on the day Germany invaded Poland, kicking off the second world war, and even while on December 7, 1941 when the Japanese attacked Pearl Harbor, the Dow was down about 3%, only a month later the index had recouped its losses (source: Bloomberg).

Broaden the analysis out a bit and we see between 1939 and 1945 while World War II raged, the Dow increased in value by 50% (source: Bloomberg).

A look at World War I also shows interesting results. While the much less evolved stock market of the time seized up and actually closed for six months at the start of hostilities in Europe, when the markets finally did begin trading again the Dow rose more than 88%, which remains the highest annual return on record for the index. In fact, from the start of the war in 1914 until the war ended in late 1918, the Dow was up more than 43%. (source: awealthofcommonsense.com)

If you’re asking yourself, “why the heck is Marc carrying on about World War?”, let me reassure it's only to make a point. Attempting to make investment decisions based on geopolitical risks has always been difficult if not impossible, and using the two most extreme examples of international conflict to validate this reality is meant to be crystal clear, if not admittedly a bit dramatic.

Being aware of financial market history, however, may not make enduring the next stage of the Ukraine conflict any easier. My personal belief is news from Ukraine is about to get even more dark and scary. So, if cooler heads cannot prevail on the international front, at least being informed and prepared may help to keep a cooler head on the investment portfolio front.

All indices are unmanaged and cannot be invested into directly.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.

Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.